The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is aRead more
The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is a contra asset account which means an account with a credit balance.
When a business first sets up a provision for doubtful debts, the full amount of the provision should be debited to bad debts expense as follows.
Bad Debts A/c
Debit
Debit the increase in expense.
To Provision for Doubtful Debts A/c
Credit
Credit the increase in liability.
In subsequent years, when provision is increased the account is credited, and when provision is decreased the account is debited. This is so because provision for doubtful debts is a contra account to debtors and has a credit balance, and is treated as a liability.
Effects of Provision for Doubtful Debts in financial statements:
Trading A/c: No effect.
Profit and Loss A/c: Debited to P&L A/c and charged as an expense.
Balance Sheet: Deducted from Debtors.
For example, ABC Ltd had debtors amounting to Rs 50,000. It creates a provision of 5% on debtors.
Yes, sure! But lets us first understand what a revaluation account is. A revaluation account is prepared to recognise the change in the book value of assets and liabilities of an entity. These changes happen when assets and liabilities are revalued to present their fair value. It is a nominal accounRead more
Yes, sure! But lets us first understand what a revaluation account is.
A revaluation account is prepared to recognise the change in the book value of assets and liabilities of an entity. These changes happen when assets and liabilities are revalued to present their fair value.
It is a nominal account because it represents gain or loss in value of assets and liabilities. However such gain or loss is unrealised because the assets and liabilities are not sold or discharged.
After revaluation of assets and liabilities, the balance of the revaluation account can be debit or credit. The debit balance means ‘loss on revaluation’ and credit balance means ‘gain on revaluation’.
The balance of revaluation is transferred to the capital account.
Journal Entries related to Revaluation Account
1. Increase in value of an asset upon revaluation:
Asset A/c
Dr.
Amt
To Revaluation A/c
Cr.
Amt
(Being asset value increased upon revaluation)
2. Decrease in value of an asset upon revaluation:
Revaluation A/c
Dr.
Amt
To Asset A/c
Cr.
Amt
(Being asset value decreased upon revaluation)
3. Increase in value of liabilities upon revaluation:
Revaluation A/c
Dr.
Amt
To Liabilities A/c
Cr.
Amt
(Being liabilities value increased upon revaluation)
4. Decrease in value of liabilities upon revaluation:
Liabilities A/c
Dr.
Amt
To Revaluation A/c
Cr.
Amt
(Being liabilities value decreased upon revaluation)
5. Transfer or distribution of the balance of revaluation account
Revaluation A/c
Dr.
Amt
To Capital/ Partners’ capital A/c
Cr.
Amt
(Being profit on revaluation transferred to capital account.
or
Capital/ Partners’ capital A/c
Dr.
Amt
To Revaluation A/c
Cr.
Amt
(Being loss on revaluation transferred to capital account.
Numerical example
P, Q and R are partners of the firm ‘PQR Trading’. They share profits and losses in the ratio 3:2:1. On 1st May 20X1, they decided to admit S for 1/6th share in profits and losses of the firm. Upon the revaluation:
Plant and machinery increased from Rs 1,20,000 to Rs. 1,30,000
The stock decreased by Rs 5000
Debtors and creditors both decreased by Rs 4,000 and Rs 6,000 respectively.
Preliminary expenses are those expenses that are incurred before the company’s business commences. These expenses are written off annually which does not involve any flow of cash. Therefore, in the cash flow statement, preliminary expenses are added back to net profit before tax and extraordinary itRead more
Preliminary expenses are those expenses that are incurred before the company’s business commences. These expenses are written off annually which does not involve any flow of cash. Therefore, in the cash flow statement, preliminary expenses are added back to net profit before tax and extraordinary items under the head operating activities (indirect method).
A cash flow statement is a financial statement that summarises the cash and cash equivalents entering and leaving the company. They can be classified into operating activities, investing activities and financing activities.
Reason for Treatment
Operating activities refer to those sources or usage of cash that relates to business activities.
As per the indirect method, the cash flow statement for operating activities begins with net profit before tax and extraordinary items. Since the company records non-cash expenditures also, they should add these back to net profit to find out the true cash flows. This is why preliminary expenses are added to net profit in the indirect method.
As per the direct method, all cash receipts are added and all cash expenses are subtracted to get cash flow from operating activities. Since preliminary expenses are a non-cash activity, they do not require any treatment in the direct method.
Preliminary expenses do not fall under the head investing activities as investing activities involve the acquisition or disposal of long term assets or investments. They do not fit in financing activities either as financing activities relate to change in capital or borrowings of the company.
Example
If the balance in preliminary expenses for the year 2019 was Rs.5,000 and its balance in 2020 reduced to 3,000, then its treatment in the cash flow statement would be:
A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company. The Cash Flow Statement provides a picture to the sRead more
A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company.
The Cash Flow Statement provides a picture to the shareholders, government, and the public of how the company manages its obligations and fund its operations. It is a crucial measure to determine the financial health of a company.
The Cash Flow Statement is created from the Income Statement and the Balance Sheet. While Income Statement shows money engaged in various transactions during the year, the Balance Sheet presents information about the opening and closing balances.
The primary objective of a Cash Flow Statement is to present a record of inflow and outflow of cash, cash equivalents, and marketable securities through various activities of a company.
Various activities in a company can be broadly classified into three parts or heads:
Cash Flow from Operating Activities: it represents how money from regular business activities is derived and spent. It includes Net Profit from Income Statement after adjusting for tax and extra-ordinary activities. Items included in Operating Activities are adjustments in Working Capital. If current liabilities are paid or current assets are bought it means outflow of cash, hence it is deducted and if liabilities are increased or assets are sold it means the inflow of cash, hence it is added. Operating Activities take into account taxation, dividend, depreciation, and other adjustments.
Cash Flow from Investing Activities: it represents aggregate inflow or outflow of cash due to various investments activities that the company was engaged in. Purchase and sale of non-current assets like fixed assets and long-term investments are considered under this head. If there is an investment made, it means outflow of cash, hence it is deducted and if there is an investment sold it means the inflow of cash, and hence it is added.
Cash Flow from Financing Activities:it represents the activities that are used to finance a company’s operations, like, issue of cash or debentures, paying dividends and interest, long-term borrowing taken by a company, etc. If these are paid, it means outflow of cash and is hence deducted and if they are acquired, it means the inflow of cash and hence ae added.
Cash Flow Statements also present a picture of the liquidity of the company and are therefore used by the management of a company to take decisions with the help of the right information.
Cash Flow Statements are a great source of comparison between a company’s last year’s performance to its current year or with other companies in the same industry and hence, helps shareholders and potential investors to make the right decisions.
It also helps to differentiate between non-cash and cash items;incomes and expenditures are divided into separate heads.
The profits earned by a company are distributed to its shareholders monthly, quarterly, half-yearly, or yearly in the form of dividends. The dividend payable by the company is transferred to the Dividend Account and is then claimed by the shareholders. If the dividend is not claimed by the members aRead more
The profits earned by a company are distributed to its shareholders monthly, quarterly, half-yearly, or yearly in the form of dividends. The dividend payable by the company is transferred to the Dividend Account and is then claimed by the shareholders.
If the dividend is not claimed by the members after transferring it to the Dividend Account, it is called Unclaimed Dividend. Such a dividend is a liability for the company and it is shown under the head Current Liabilities.
The dividend is transferred from the Dividend Account to the Unclaimed Dividend Account if it is not claimed by the shareholders within 37 days of declaration of dividend.
For the Cash Flow Statement, unclaimed dividend comes under the head Financing Activities.
Items shown under the head Financing Activities are those that are used to finance the operations of the company. Since, money raised through the issue of shares finances the company, any item related to shareholding or dividend is shown under the head Financing Activities.
However, there are two approaches to deal with the treatment of Unclaimed Dividend:
First, since there is no inflow or outflow of cash, there is no need to show it in the cash flow statement.
Second, the unclaimed dividend is deducted from the Appropriations, that is, when Net Profit before Tax and Extraordinary Activities is calculated.
Then, it is added under the head Financing Activities because the amount of dividend that has to flow out of the company (that is Dividend Paid amount which has already been deducted from Financing Activities) remained in the company only since it has not been claimed by the members.
The second approach to the treatment of an Unclaimed Dividend is used when the company has not transferred the unclaimed dividend amount from the Dividend Account to a separate account.
Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use. Computation of effective capital is given in Explanation I to Schedule II of the CoRead more
Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use.
Computation of effective capital is given in Explanation I to Schedule II of the Companies Act. Schedule II deals with remuneration payable to managers in case of no profit or inadequate profit in the following manner:
Computation of effective capital is done in the following manner:
Numerical example:
ABC Ltd reports its balance sheet as given below:
We will compute its effective capital for both an investment company and a non-investment company.
The major affairs of the company are handled by the manager and hence he is entitled to receive some compensation for his efforts. This is termed Managerial Remuneration. The manager has to bring out the maximum potential of the employees while ensuring that the interests of the shareholders and othRead more
The major affairs of the company are handled by the manager and hence he is entitled to receive some compensation for his efforts. This is termed Managerial Remuneration. The manager has to bring out the maximum potential of the employees while ensuring that the interests of the shareholders and other stakeholders are secured.
MAXIMUM REMUNERATION
As per section 197 of the Companies Act, the Company has certain limits on paying maximum remuneration, depending on whether he is working full-time or part-time. If the company has only one whole-time manager, he is entitled to a maximum remuneration of 5% of net profits. If there is more than one whole time manager, then the percentage increases to 10%.
For part-time directors, the remuneration allowed is 1% of net profits (if there is a whole-time director present) and if no whole-time manager is present, then remuneration for a part-time director is 3%.
Therefore, a company can only pay a maximum remuneration of 11% of net profits.
A public company is allowed to pay remuneration in excess of 11% by :
Passing a special resolution approved by the shareholders
Subject to compliance with Schedule V conditions
Remuneration can be paid to such managers who do not have any direct interest in the company and also possesses special knowledge and expertise along with a graduate-level qualification.
PENALTY
Any person who fails to comply with the provisions of managerial remuneration shall be punishable with a fine that can vary from Rs. 1 Lakh to a maximum of Rs. 5 Lakhs.
However, Sec 197 applies to only public companies and hence private companies are free to pay managerial remuneration with no upper limit.
How to do provision for doubtful debts adjustment?
The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is aRead more
The provision for doubtful debts is the estimated amount of bad debts which will be uncollectible in the future. It is usually calculated as a percentage of debtors. The provision for a doubtful debt account has a credit balance and is shown in the balance sheet as a deduction from debtors. It is a contra asset account which means an account with a credit balance.
When a business first sets up a provision for doubtful debts, the full amount of the provision should be debited to bad debts expense as follows.
In subsequent years, when provision is increased the account is credited, and when provision is decreased the account is debited. This is so because provision for doubtful debts is a contra account to debtors and has a credit balance, and is treated as a liability.
Effects of Provision for Doubtful Debts in financial statements:
For example, ABC Ltd had debtors amounting to Rs 50,000. It creates a provision of 5% on debtors.
Provision for Doubtful Debts = 50,000*5%
= 2,500
Journal entry for provision will be:
Effect on financial statements will be:
See lessCan you show a revaluation account example?
Yes, sure! But lets us first understand what a revaluation account is. A revaluation account is prepared to recognise the change in the book value of assets and liabilities of an entity. These changes happen when assets and liabilities are revalued to present their fair value. It is a nominal accounRead more
Yes, sure! But lets us first understand what a revaluation account is.
A revaluation account is prepared to recognise the change in the book value of assets and liabilities of an entity. These changes happen when assets and liabilities are revalued to present their fair value.
It is a nominal account because it represents gain or loss in value of assets and liabilities. However such gain or loss is unrealised because the assets and liabilities are not sold or discharged.
After revaluation of assets and liabilities, the balance of the revaluation account can be debit or credit. The debit balance means ‘loss on revaluation’ and credit balance means ‘gain on revaluation’.
The balance of revaluation is transferred to the capital account.
Journal Entries related to Revaluation Account
1. Increase in value of an asset upon revaluation:
2. Decrease in value of an asset upon revaluation:
3. Increase in value of liabilities upon revaluation:
4. Decrease in value of liabilities upon revaluation:
5. Transfer or distribution of the balance of revaluation account
or
Numerical example
P, Q and R are partners of the firm ‘PQR Trading’. They share profits and losses in the ratio 3:2:1. On 1st May 20X1, they decided to admit S for 1/6th share in profits and losses of the firm. Upon the revaluation:
Let’s prepare the revaluation account.
See lessWhat is the treatment of preliminary expenses in cash flow statement?
Preliminary expenses are those expenses that are incurred before the company’s business commences. These expenses are written off annually which does not involve any flow of cash. Therefore, in the cash flow statement, preliminary expenses are added back to net profit before tax and extraordinary itRead more
Preliminary expenses are those expenses that are incurred before the company’s business commences. These expenses are written off annually which does not involve any flow of cash. Therefore, in the cash flow statement, preliminary expenses are added back to net profit before tax and extraordinary items under the head operating activities (indirect method).
A cash flow statement is a financial statement that summarises the cash and cash equivalents entering and leaving the company. They can be classified into operating activities, investing activities and financing activities.
Reason for Treatment
Operating activities refer to those sources or usage of cash that relates to business activities.
As per the indirect method, the cash flow statement for operating activities begins with net profit before tax and extraordinary items. Since the company records non-cash expenditures also, they should add these back to net profit to find out the true cash flows. This is why preliminary expenses are added to net profit in the indirect method.
As per the direct method, all cash receipts are added and all cash expenses are subtracted to get cash flow from operating activities. Since preliminary expenses are a non-cash activity, they do not require any treatment in the direct method.
Preliminary expenses do not fall under the head investing activities as investing activities involve the acquisition or disposal of long term assets or investments. They do not fit in financing activities either as financing activities relate to change in capital or borrowings of the company.
Example
If the balance in preliminary expenses for the year 2019 was Rs.5,000 and its balance in 2020 reduced to 3,000, then its treatment in the cash flow statement would be:
See lessWhat is the primary objective of cash flow statement?
A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company. The Cash Flow Statement provides a picture to the sRead more
A cash flow statement is a statement showing the inflow and outflow of cash and cash equivalents during a financial year. Cash Flow Statements along with Income statements and Balance Sheet are the most important financial statements for a company.
The Cash Flow Statement provides a picture to the shareholders, government, and the public of how the company manages its obligations and fund its operations. It is a crucial measure to determine the financial health of a company.
The Cash Flow Statement is created from the Income Statement and the Balance Sheet. While Income Statement shows money engaged in various transactions during the year, the Balance Sheet presents information about the opening and closing balances.
The primary objective of a Cash Flow Statement is to present a record of inflow and outflow of cash, cash equivalents, and marketable securities through various activities of a company.
Various activities in a company can be broadly classified into three parts or heads:
Cash Flow Statements also present a picture of the liquidity of the company and are therefore used by the management of a company to take decisions with the help of the right information.
Cash Flow Statements are a great source of comparison between a company’s last year’s performance to its current year or with other companies in the same industry and hence, helps shareholders and potential investors to make the right decisions.
It also helps to differentiate between non-cash and cash items; incomes and expenditures are divided into separate heads.
See lessHow to do treatment of unclaimed dividend in cash flow statement?
The profits earned by a company are distributed to its shareholders monthly, quarterly, half-yearly, or yearly in the form of dividends. The dividend payable by the company is transferred to the Dividend Account and is then claimed by the shareholders. If the dividend is not claimed by the members aRead more
The profits earned by a company are distributed to its shareholders monthly, quarterly, half-yearly, or yearly in the form of dividends. The dividend payable by the company is transferred to the Dividend Account and is then claimed by the shareholders.
If the dividend is not claimed by the members after transferring it to the Dividend Account, it is called Unclaimed Dividend. Such a dividend is a liability for the company and it is shown under the head Current Liabilities.
The dividend is transferred from the Dividend Account to the Unclaimed Dividend Account if it is not claimed by the shareholders within 37 days of declaration of dividend.
For the Cash Flow Statement, unclaimed dividend comes under the head Financing Activities.
Items shown under the head Financing Activities are those that are used to finance the operations of the company. Since, money raised through the issue of shares finances the company, any item related to shareholding or dividend is shown under the head Financing Activities.
However, there are two approaches to deal with the treatment of Unclaimed Dividend:
First, since there is no inflow or outflow of cash, there is no need to show it in the cash flow statement.
Second, the unclaimed dividend is deducted from the Appropriations, that is, when Net Profit before Tax and Extraordinary Activities is calculated.
Then, it is added under the head Financing Activities because the amount of dividend that has to flow out of the company (that is Dividend Paid amount which has already been deducted from Financing Activities) remained in the company only since it has not been claimed by the members.
The second approach to the treatment of an Unclaimed Dividend is used when the company has not transferred the unclaimed dividend amount from the Dividend Account to a separate account.
See lessWhat is effective capital?
Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use. Computation of effective capital is given in Explanation I to Schedule II of the CoRead more
Effective Capital is an amount calculated for purpose of arriving at the maximum limit of managerial remuneration as per the Companies Act, 2013 where profit is inadequate or no profit. Other than that it has no use.
Computation of effective capital is given in Explanation I to Schedule II of the Companies Act. Schedule II deals with remuneration payable to managers in case of no profit or inadequate profit in the following manner:
Computation of effective capital is done in the following manner:
Numerical example:
ABC Ltd reports its balance sheet as given below:
We will compute its effective capital for both an investment company and a non-investment company.
See lessWhat is managerial remuneration?
The major affairs of the company are handled by the manager and hence he is entitled to receive some compensation for his efforts. This is termed Managerial Remuneration. The manager has to bring out the maximum potential of the employees while ensuring that the interests of the shareholders and othRead more
The major affairs of the company are handled by the manager and hence he is entitled to receive some compensation for his efforts. This is termed Managerial Remuneration. The manager has to bring out the maximum potential of the employees while ensuring that the interests of the shareholders and other stakeholders are secured.
MAXIMUM REMUNERATION
As per section 197 of the Companies Act, the Company has certain limits on paying maximum remuneration, depending on whether he is working full-time or part-time. If the company has only one whole-time manager, he is entitled to a maximum remuneration of 5% of net profits. If there is more than one whole time manager, then the percentage increases to 10%.
For part-time directors, the remuneration allowed is 1% of net profits (if there is a whole-time director present) and if no whole-time manager is present, then remuneration for a part-time director is 3%.
Therefore, a company can only pay a maximum remuneration of 11% of net profits.
A public company is allowed to pay remuneration in excess of 11% by :
Remuneration can be paid to such managers who do not have any direct interest in the company and also possesses special knowledge and expertise along with a graduate-level qualification.
PENALTY
Any person who fails to comply with the provisions of managerial remuneration shall be punishable with a fine that can vary from Rs. 1 Lakh to a maximum of Rs. 5 Lakhs.
However, Sec 197 applies to only public companies and hence private companies are free to pay managerial remuneration with no upper limit.
See less